Purchase with gift of equity, then flip

[3brothers]

What is the name of your state? Indiana

My mother has a rental home valued at roughly $75K, with $15K owed on the loan. It was once her primary residence, but she now rents it - after getting married. My mother would like to give the home to me and my 2 brothers (mother and Home are in Mississippi - me and 1 brother=Indiana, other brother=Wisconsin). We will then invest approx $5-$10K in the home, to prepare it to be sold. We expect to break-even on the repair investments, simply to get it in a condition to sale.

My 2 brothers and I will need a loan in order to pay it off, and have enough money for repairs and to float it through 2007. I will be the only name on the loan, as my brothers do not have the credit and/or do not wish to tie themselves down with the loan. Though, they will contribute 1/3 of the note - which shouldn't total more than $300/month. Once sold, my brothers and I will share the profit equally (minus any fees I absorb through the process) - as we invest it. Ultimately, the cash will stay available, in case my mother ever needs it.

I am prequalified for a loan up to $40K. Though, I do not know how to structure the sale, in order to limit ourselves from a tax perspective, with a future sale pending. We need to complete the Sales ASAP - preferable by EOY. The current renters will vacate in March. We will then kick-off repairs, and expect it to take 6 months to sale.

With 2006 nearing an end, how can we structure the sale to limit ourselves from future capital gains, while maximizing profits? Can my mother gift equity in 2006 as we prepare a bill of sale, and then gift again in 2007, as we complete the transaction (from mother to sons) in early January? Do we need to form an LLC? If so, how is the LLC viewed from a bank's perspective, regarding the purchase, and would I need to register the Indiana LLC in MS?

What's my best approach? Any advice would be greatly appreciated!

Thanks!

[lcannister]

When you start throwing " Ultimately, the cash will stay available, in case my mother ever needs it." into the mix medicaid fraud comes to mind. Sale pending gives me another shiver too!

[tranquility]

You need to see a CPA. It's not that advice cannot be had here, it's just that a lot more facts would need to be known before any good advice could be given.

Let's face it, you are planning on starting a business. This will impact many areas of your life and interact in many areas of your brothers' and mother's lives. Duties and responsibilities all change. And, without a clear and written plan everyone agrees to, if things go wrong the family disentegrates. Also, while I wouldn't say fraud, say mom needs medicare two years from now--one year after you sell the house and divide the money. Who's going to come up with that cash? Better get it in writing.

[3brothers]

Apparently, I should have provided more details, or at least been more specific and not have assumed my written word would be taken at it's face value...

Medicare is NOT the hidden agenda - my mother is not nearly old enough, is in good health, and currently employed.

She is barely (if) breaking-even with renting the house, and doesn't want to worry with it any longer. After getting re-married, she kept the house as an investment. Though, renting it has caused her alot of stress. She feels strongly that the house (or it's value) is her son's, yet we all live out of state and don't want to worry with renting it either. Additionally, my mother wants to assure the home (or it's value) is ours if anything ever happens to her. There are a number of complicating factors, involving her marital situation... While other options exist, they don't fit easily into the equation - as she doesn't want to continue renting any longer. Repairs will be critical, before the house can be sold for any value. Though, my mother cannot navigate such an effort (loan, contractors and such).

[mtpockets]

Will the increase in value after the house is fixed up exceed the cost to repair it? If it is causing her stress, perhaps selling the house "as is" is the simplest solution. If she resided in the house for at least 2 years during the 5-year period preceding the sale, there will be no capital gains to report on her federal incomet tax return.